Ebook Corporate and business laws: Part 2

Ebook Corporate and business laws: Part 2 presents the following content: Formation of a Company; Articles of Association; Prospectus, Shares and Share Capital; Management of Companies; Winding up and Dissolution of a Company;...Please refer to the documentation for more details.
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Ebook Corporate and business laws: Part 2 Lalit Bhalla, Lovely Professional University Unit 8: Formation of a Company Unit 8: Formation of a Company Notes CONTENTS Objectives Introduction 8.1 Promotion 8.1.1 Who is a Promoter? 8.1.2 Duties and Liabilities of Promoters 8.2 Registration (Ss.12, 33) 8.2.1 Availability of Name 8.2.2 Certificate of Incorporation/Consequences of Incorporation 8.3 Floatation 8.4 Commencement of Business 8.5 Summary 8.6 Keywords 8.7 Review Questions 8.8 Further Reading Objectives After studying this unit, you will be able to: Discuss about the promotion of a company; Recognize the significance of registration; Explain the context of flotation; Describe the aspects concerning certificate of business. Introduction The whole process of formation of a company may be roughly divided, for convenience, into four parts. These are: (i) Promotion; (ii) Registration/Incorporation, (iii) Floatation/Raising of capital; and (iv) Commencement of business. 8.1 Promotion Promotion is a term of wide importance denoting the preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. The promoter may be an individual, syndicate, association, partnership or a company. LOVELY PROFESSIONAL UNIVERSITY 201 Corporate and Business Laws Notes 8.1.1 Who is a Promoter? Perhaps, the true test of whether a person is a promoter, whether he has a desire that the company be formed and is prepared to take some steps necessary, therefore, which may or may not involve other persons and implements his plans to form the company. However, persons assisting the promoters by acting in a professional capacity do not thereby become promoters themselves. The solicitor who drafts the articles, or the accountant who values assets of a business to be purchased, are merely giving professional assistance to the promoters. If, however, a professional goes further than this, e.g., by introducing his client to a person who may be interested in purchasing shares in the proposed company, he would be regarded as a promoter. Did u know? Sections that uses term promoter This term has not been defined under the Act, although the term is used expressly in Ss.62, 69, 76, 478 and 519. 8.1.2 Duties and Liabilities of Promoters (Promoters’ Legal position) Promoters have been described to be in fiduciary relationship (relationship of trust and confidence) with the company. He should not make any secret profit at the expense of the company he promotes, without the knowledge and consent of the company and if he does so, the company can compel him to account for it. A promoter is not forbidden to make profit, but to make secret profit. In Gluckstein vs. Barnes (1900) AC 240, a syndicate of persons was formed to buy a property called ‘Olympia’ and resell it to a company to be formed for the purpose. The syndicate first bought the debentures of the old Olympia company at a discount. Then they bought the company itself for £ 1,40,000. Out of this money provided by themselves, the debentures were repaid in full and a profit of £ 20,000 made thereon. They promoted a new company and sold Olympia to it for £ 1,80,000. The profit of £ 40,000 was revealed in the prospectus but not the profit of £ 20,000. Held: Profit of £ 20,000 was a secret profit and, the promoters of the company were bound to pay it to the company because the disclosure of this profit by themselves in the capacity of vendors to themselves in the capacity of directors of the purchasing company, was not sufficient. Disclosure to be made to whom? In Erlanger vs New Sombrero Phosphate Co., (39 LT 269), it was held that the disclosure should be made to an independent and competent Board of directors. This duty is not discharged if the disclosure is made to the Board of directors who are mere nominees of the majority shareholders/promoters, or are in his pay. Where it is not possible to constitute an independent Board of directors, the disclosure should be made to the whole body of persons who are invited to become shareholders and this can be done through the prospectus. Thus, the promoters have to ensure that ‘the real truth is disclosed to those who are induced by the promoters to join the company.’ ! Caution The relationship of trust and confidence requires the promoter to make ...